Banks Face Pressure to Turn Strong Capital into Earnings
By Patience Ikpeme
Nigeria’s recapitalised banks are expected to enter 2027 with stronger capital positions, but the enlarged financial buffers will come under pressure as lenders are required to prove that the fresh capital can generate sustainable earnings and support increased lending to the real economy.
DataPro, a credit rating and risk assessment firm, said the banking industry’s biggest challenge after the recapitalisation would no longer be simply meeting regulatory capital requirements, but ensuring that the additional equity produces stronger and lasting returns.
The company made the assessment in the first edition of its Risk Quarterly magazine, released alongside its October Monthly Rating Brief.
According to DataPro, about ₦4.65 trillion was injected into the banking industry through the 2026 recapitalisation exercise, pushing the average Capital Adequacy Ratio (CAR) of banks to 25.5 per cent.
The stronger capital position, however, came after a major clean-up of banks’ balance sheets, with lenders writing off about ₦2.9 trillion in bad loans.
DataPro said the loan write-offs represented about 63 per cent of the fresh capital raised by the banks, leaving lenders with the task of rebuilding the quality and profitability of their assets after the clean-up.
With capital adequacy no longer expected to be the industry’s main concern, DataPro identified three major issues that bank boards would have to manage in 2027: regulatory capital requirements at holding-company level, weak flow of credit to productive businesses and uncertainty associated with the election cycle.
The first challenge is the proposed requirement by the Central Bank of Nigeria (CBN) for bank holding companies, or HoldCos, to maintain a 20 per cent capital buffer.
DataPro said the proposed requirement could result in a significant portion of banks’ capital being held at the parent-company level rather than deployed by operating banking subsidiaries.
This, it said, could put pressure on banks’ returns on equity because capital that is required to remain at HoldCo level may not directly generate operating income.
The impact could be particularly significant for Nigerian banking groups with international operations.
DataPro estimated that the proposed requirement could create additional HoldCo capital needs of about ₦656 billion for Access Holdings and ₦416 billion for United Bank for Africa (UBA).
The implication is that banks may have to manage their capital more carefully as they seek to balance regulatory requirements with shareholders’ expectations for returns.
The second challenge identified by the rating firm is what it described as a “productive credit trap”, reflecting the difficulty of converting the banking system’s large pool of funds into loans for businesses and other productive activities.
Nigeria’s banking sector has about ₦180 trillion in assets, but DataPro said lending to the real economy remains relatively limited.
A major factor is the continued high Cash Reserve Ratio (CRR), which requires banks to keep a substantial portion of their deposits with the CBN without earning normal lending returns on those funds.
DataPro also pointed to the attraction of government securities, particularly Treasury bills, whose yields have been around 21 per cent.
The combination of the 45 per cent CRR and relatively attractive Treasury bill yields has created what the firm called a “liquidity gravity”, encouraging banks to keep funds in low-risk government instruments instead of extending more loans to businesses.
This has implications for small businesses, which form the largest part of Nigeria’s business community.
DataPro said micro, small and medium enterprises account for about 96 per cent of Nigerian businesses but receive less than five per cent of formal bank credit.
The imbalance means that stronger bank balance sheets may not automatically translate into easier access to finance for the businesses that provide a large share of employment and economic activity.
For the banks, however, increasing lending also carries risks, particularly following the large-scale loan clean-up that accompanied the recapitalisation exercise.
The challenge will therefore be to increase credit without returning to the pattern of weak underwriting and rising non-performing loans that can erode capital.
DataPro’s third major concern is the effect of election-related uncertainty on banking operations and lending.
The firm expects liquidity in the financial system to increase towards the end of 2026 as preparations for the national elections gather momentum.
At the same time, the CBN has reduced its Monetary Policy Rate by 350 basis points to 23 per cent, a move that signals a change in the direction of monetary policy. However, DataPro noted that the CRR remains at 45 per cent.
It therefore expects the high reserve requirement to continue limiting the amount of liquidity banks can readily convert into private-sector credit, despite the reduction in the benchmark interest rate.
According to the firm, significant expansion in lending to businesses may not take place until election-related uncertainty begins to ease in early 2027.
For bank boards and management teams, this creates a difficult balancing act. They will need to deploy the capital raised during the recapitalisation exercise while protecting asset quality, controlling costs and maintaining adequate buffers against economic shocks.
DataPro said the banking industry had effectively moved into a new phase in which meeting minimum regulatory capital requirements would no longer be enough to distinguish one bank from another. “Meeting minimum capital levels is now an entry condition rather than a differentiator,” the firm said.
The focus, it added, would increasingly shift towards the ability of banks to turn stronger balance sheets into consistent earnings and productive economic activity.
DataPro said banks would need to bring their cost-to-income ratios below 50 per cent as part of efforts to improve efficiency and profitability.
They would also need to raise their loan-to-deposit ratios above 65 per cent, indicating a greater willingness and capacity to convert deposits into loans.
But the firm said increased lending must be accompanied by stronger risk management to ensure that the post-recapitalisation expansion of credit does not create another cycle of bad loans.
